Save on Your Student Loans

For many, college equals debt. Nearly half of all college graduates leave school with debt -- and carry it, and carry it. Public-college grads owe an average $11,950, and their private school peers owe $14,290, according to the American Council on Education.

July 1 is the annual date on which interest rates change on any student loans without a fixed rate. The rate is adjusted according to a formula based on the interest rates of Treasury securities. Those rates are rising and are expected to go higher as the Federal Reserve tries to slow down the economy and prevent inflation.

If you're carrying many and large student loans, you may want to consolidate them before interest rates rise. That means acting fast: You must get your loan application in and approved before July 1.

Should you consolidate? Here are some things to consider.

Loan Savings

Get a fixed rate now before rates rise again, and you can lock in the average of the loans' present rates, perhaps resulting in substantial savings. One student loan firm, USA Group, projects that a borrower with $20,000 in student debt could save close to $1,000 over 10 years by consolidating.

For example, rates for Stafford loans today range from 6.32 percent to 7.72 percent and could go as high as the legal cap of 8.25 percent. PLUS loans are 7.72 percent to 7.98 percent and are capped at 9 percent. Experts expect the July 1 changes to put the interest rates on these loans at or close to their caps.

Life of the Loan

Just as when you decide to go from a variable-rate to a fixed-rate mortgage, essentially you're betting that interest rates will not go down in the future. If you have 8 or 10 years left on your loan, you might want to think beyond what will happen as a result of this upcoming rate change.

Some years back a real estate lawyer said to me, "Mortgage rates are never going to be lower than they are now." And then they took the great plummet -- and stayed that way for several years. Moral of this story? Never say never.

Loss of Loan Perks

Joanna Acocella of Sallie Mae, the biggest financer of student loans in the U.S., notes that consolidation is irreversible and, in addition, changes your status to "new borrower." You could lose any benefits you might have under your present loan.

For instance, borrowers whose payments are debited from their bank accounts can qualify for a quarter-point rate cut with some lenders. After three or four years of on-time payments some lenders will also cut the rate by as much as 2 points. Those benefits, for many, would be greater than the rate they can get by consolidating. (Sallie Mae is one lender that offers such discounts, but when loans are consolidated those discounts are no longer available, Acocella says.)

Smaller payment vs. more interest paid? Consolidation's trade-off: if you extend the life of your loan, you'll get a smaller monthly payment, but you might end up paying more interest over the long haul. In most cases, USA Group advises, borrowers are better off repaying their loans as quickly as possible.

You can get more information by visiting the U.S. Department of Education's loan consolidation page. Sallie Mae (which started out as a government-chartered institution but is now owned by share-holders) also has information for student loan borrowers.

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